Brexit negotiations: is Europe softening its stance?

The Economist Intelligence Unit's Europe team has updated an index that it constructed in April 2017, which measures the intensity of the EU27 countries' opposition to the UK's negotiating positions on core issues related to Brexit.

These issues are defined by the objectives laid out by the UK government in a white paper on the future relationship, published in June 2018.

Our index shows that countries with the closest trade ties to the UK may be willing to support the free-trade area for goods proposed by the UK, but that most are against ending free movement of people.

The majority of member states are keen to maintain strong defence and security ties, but some are opposed to a special arrangement on financial services.

Overall, the aggregate stance of the EU27 has softened since we first measured it. In part this reflects the resolution of some of the most contentious issues and possibly a greater willingness to compromise as the negotiations have progressed.

Member states have been reluctant to break ranks to support the UK for fear of undermining EU unity; however, if there is no breakthrough in the negotiations in the coming months, some may be more willing to lobby for a softer approach.

The issues at the core of Brexit negotiations have evolved since we categorised them in our original index as follows: the Brexit bill; the four EU freedoms (movement of goods, services, workers and capital); trade arrangements; and defence ties. A financial settlement has been reached in the withdrawal agreement, and the UK's vision of future trade arrangements and its approach to the four EU freedoms has been outlined in a white paper published by the government in June 2018. We have therefore amended the core negotiating issues in our index as follows: a free-trade area for goods, with a common rulebook; an end to free movement of people; a special regulatory arrangement for financial services; and strong defence and security ties. We have assessed the stance of EU member states on each issue in our updated index.

Free-trade area for goods, with a common rulebook

The government's white paper proposes an association agreement between the UK and the EU, drawing on precedents set by the free-trade agreement between the EU and Canada, and the association agreement between the EU and Ukraine, both of which include an overarching institutional structure as well as a free-trade area. According to the white paper, a free-trade area for goods would protect the integrated supply chains and "just-in-time" processes that have developed across the UK and the EU, and avoid customs procedures at the border, including between Northern Ireland and the Republic of Ireland. This would mean establishing a common rulebook for manufactured goods and agri-food to ensure that trade is frictionless, and would require the UK to continue participating in (and therefore contributing funds to) some EU agencies, particularly those for highly regulated sectors. The UK would pay "due regard" to European Court of Justice (ECJ) case law in areas covered by the common rulebook.

Countries with existing close trade ties to the UK may be more willing to accept the rulebook proposal than others, who may push for the UK to adhere to all EU product regulations. We assume that seven countries would be supportive of this plan—including Ireland, Cyprus and Poland—whereas the vast majority would probably support it but would have big reservations about aspects of the framework and may push for adjustments to it. Only France, Austria, Bulgaria, Croatia and Romania are likely to take a hard line against the plan on the grounds that it allows the UK to have selective access to the single market and does not require it to adhere to all EU product regulations.

End free movement of people

Immigration is the issue on which we expect EU member states to take the hardest stance. The UK government wants free trade in goods to continue, but by saying that free movement of people will end, it is seen to be "cherry-picking" from the four freedoms. From the start of the negotiations this has been a red line for the EU and an issue on which most member states are aligned. Most of the founding members of the European project—Belgium, France, Luxembourg, the Netherlands and Germany—will take a hard line here, and many others have implied in the past that the trade-off between access to the single market in a new trade arrangement and migration restrictions will be strict. Reflecting this, we have 13 countries categorised as "hardcore" on this issue, and the remaining 14 categorised as "hard". The UK has proposed a mobility framework that would allow UK and EU citizens to travel freely (without a visa) for tourism and temporary business activities, and facilitate mobility for students. However, this may still be too restrictive an arrangement for most member states to accept.

Special regulatory arrangement for financial services

The UK's proposed free-trade area would not cover services, and the UK would no longer operate under the EU's "passporting" regime. However, owing to the inter-connectedness of the UK's and the EU's financial services markets, the UK government has called for a more comprehensive arrangement than third-country equivalence would provide, namely a new regulatory arrangement that would encompass a broader range of crossborder activities, with institutional dialogue to keep rules compatible, a "mediated solution" to avoid divergence of rules, and reciprocal supervisory co-operation to protect financial stability.

This proposal reflects the UK view that the EU's existing equivalence regime for third countries is not appropriate for the depth of UK-EU ties in this sector. Equivalence also applies only in certain areas and can be withdrawn by the EU at 30 days' notice, introducing inherent risks and uncertainties into UK financial institutions' operations. Meanwhile the EU has objected to the "joint" nature of the arrangement proposed by the UK, as equivalence is granted unilaterally and is based only on EU rules.

However, there is probably scope for a special deal between the EU and the UK on financial services, and our index reflects that. London is a crucially important service provider, and many countries would be adversely affected by the prospect of no deal in this area. As a result, most countries take a relatively soft stance on the issue, with the exception of those aiming to bring more London-based activities "in house", such as Germany, Ireland and the Netherlands. For the same reason, France takes the hardest stance on this issue; in November 2017 Paris was selected as the city to host the European Banking Authority (EBA) after Brexit, and is already home to the European Securities and Markets Authority (ESMA).

Maintain defence ties

Defence and security is the issue on which the UK-EU vision for the post-Brexit relationship is most closely aligned. The UK has proposed a new security partnership that maintains existing operational capabilities (including access to data), UK participation in Europol and Eurojust, active co-ordination on foreign policy issues and joint capability development (for example the interoperability of UK and EU militaries). Moreover, in June France, Germany, Belgium, the UK, Denmark, the Netherlands, Estonia, Spain and Portugal signed a letter of intent to form a new military force.

The Nordic and Baltic states and Poland are concerned that security guarantees from the EU could be imperilled by looser ties with the UK. Fearing that Russia might lash out and worried about US support for NATO under the presidency of Donald Trump, these countries will be keen to continue security co-operation with the UK, the EU's pre-eminent defence power. Neither Sweden nor Finland are militarily aligned, and although both countries are members of NATO's Partnership for Peace, they depend on bilateral defence agreements, including a Nordic Defence Co-operation pact, and security protections offered by the EU.

Estonia, Latvia, Lithuania and Poland have voiced concerns about losing the UK's involvement in European security policy, particularly given the UK's military presence in these countries as part of NATO's effort to build up forces in the area. Moreover, once the UK leaves the EU, France will be the only remaining standing member of the UN Security Council in the bloc, and the only nuclear power. France is therefore also likely to want to maintain close ties with the UK on defence after Brexit, and may take the lead on EU defence negotiations, as this is one area in which it is the stronger partner in the Franco-German relationship.

A softer stance by most

Based on updated and more specific negotiating objectives laid out by the UK, more EU countries have shifted their stance into the softer categories. This is partly because one of the most contentious aspects of the negotiations, the financial settlement, on which most member states took a hardcore stance last year, has been resolved in the withdrawal agreement. However, a softer stance from some member states might also result from a clarification of the UK's position. There may also be a greater willingness to compromise by some countries as the negotiations have progressed and as the deadline to reach a deal draws closer.

Nonetheless, even those countries that are most sympathetic to the UK will continue to be bound by the EU's most important red line and will refrain from doing anything that might undermine the future cohesion of the bloc. Most EU member states believe that the UK's withdrawal must be costly and that any future trade arrangement must offer worse terms than full membership did, and the importance of maintaining good relations with the remaining EU members will dissuade them from undermining the group's overall negotiating position.

As has been the case from the start, the EU's negotiating stance is determined by the overarching goal of defending the interests of the bloc and discouraging others from following the example of the UK at a time when member states are demanding more national sovereignty. For the EU's founding members, France and Germany in particular, protecting the future cohesion and stability of the EU will trump a softly-softly approach on trade or other issues. Nevertheless, given that many member states have an interest in maintaining close trading, financial and security relations with the UK, there is the potential for internal discord among the EU27, especially if there is no breakthrough in the negotiations in the coming months and a no-deal Brexit becomes more likely. Some member states might then lobby for a softer approach, and there may be scope for the UK to use this leverage to get a better deal.